While it is a given that everyone earning an income above a certain figure is supposed to pay taxes, many professionals are still not clear about planning their taxes and, as a result, end up either doing nothing or making the wrong decisions – both can be expensive mistakes. Let us take a quick look at some of the common mistakes that people make and how you can avoid them:
Investing to save tax only
Long-term financial planning and tax planning go hand-in-hand. Which is why, instead of just relegating tax planning to the last quarter or the last few weeks of the financial year, make it a part of your short-term and long-term financial goals. Start early, so when you have the whole year planned out and tax-saving is a part of it, your investments are incremental and manageable in size, instead of consuming a sizeable chunk of your liquid resources in one shot at the year-end.
A well-planned financial strategy also helps to build a portfolio suited to goals, even for tax – whether it is FDs, equity-linked tax-saving mutual funds, or provident fund or a mixture of various options.
Investing too much or investing too little
A well-planned financial strategy also helps to build a portfolio suited to goals, even for tax – whether it is FDs, equity-linked tax-saving mutual funds, or provident fund or a mixture of various options. It might be a good idea to pen down a list of all deductions that you can claim during the year, so you can be systematic about what you already have in hand and know how much you need to invest. This way, you will avoid the last-minute pressure of tax planning, but will also make relevant investments.
Look before you leap
The biggest financial mistake that you can make is to invest purely for tax saving as this means you have not been able to evaluate all the risk and return options and map them against your long-term financial goals. For example, if you invest in PPF, you need to be aware of the lock-in period, which is 15 years, compared to say an Equity Linked Saving Scheme (ELSS) where it is 3 years, or a National Saving Certificate (NSC) where it is 5 years. So, if liquidity is key, ELSS is the most suited. So, make sure you take time to research your options and understand which ones help you avail the various permissible allowances, deductions, exemptions and rebates while serving your long-term financial goals.
Your expenses can save you tax too
This is true! The expenses you incur in your daily lives too have the potential to be eligible for deductions and thus, help you save tax. Here is a short list: school fees, rent receipts, medical expenses, stamp duty and registration fees for the purchase of immovable property, charitable donations, interest on housing loans, etc., all can have a hand in reducing your tax liability at the end of the year. If you keep track of all expenses undertaken during the year that are eligible for deduction (along with relevant receipts) your tax burden reduces.
Ignoring risk and liquidity concerns.
Those who wait till the last minute to address their tax liability may end up making an investment that appears to be convenient but may not be the most efficient use of your funds. If you are a stability-seeking investor, chances are that you will invest in traditional options such as tax-saving fixed deposits or PPF. Considering the 15 year lock-in period, if you stay invested in tax saver mutual funds, not only will the market volatility even out over the period, but you would have also created wealth with inflation-beating returns.
Make investments that not only address your tax liabilities but also help you achieve your life goals. Equity Linked Saving Scheme (ELSS) as an option to save tax clearly stands out. ELSS offers a combination of short lock-ins, market-linked returns and greater flexibility – and can be initiated with an amount as low as Rs. 500 per month. While you can encash your investment after three years from the date of purchase if you need funds, the longer you stay invested, the more time your money will have to grow.
As the financial year 2019-20 comes to a close, take a few minutes to understand the investments and expenses you have in your kitty that make you eligible for tax deductions, before you make any further investments – and remember to start the next financial year early and in a more planned and structured manner.